Don’t always believe what you read…

Unsuitable sales tactics are a part of every industry, pushing people to buy products that aren’t fit for their needs based on false or misleading information. Its prevalence in finance in particular has pushed regulators to act. As a consequence, companies that sell financial products and services have restrictions on how they can advertise and communicate. This is an important step to reducing the amount of unsuitable advice, protecting the unknowing consumer in the process.

Some elements of the media however, seem to have a different set of rules; often writing negative content which can distort the views, behaviour and even psychological stability of private investors. As an example, news stories often focus on what’s happening to a narrow index of companies. This is not a great comparison for most private investors, as they are likely to be invested in different markets, geographies and asset classes. Sensualisation is, as always, top of their agenda; choosing an equity index probably because the price can swing violently. People would be unlikely to buy papers if the headline was “diversified portfolio falls 0.05% in one day amongst market drought”.

Focusing on a couple of recent headlines outlines how phrasing can dramatically affect perspective. “FTSE touches lowest level seen in two decades” could suggest that if you had invested 20 years ago, today you would be looking at a 0% return. Looking from a slightly different angle though, what this low price doesn’t account for is the 3.28% dividend that’s been paid out on average each year over the same period. If you had just taken the income this would have equated to a 65.6% return (3.28% x 20), and you would have also had the choice of reinvesting it.

Another example which was covered in depth by the media, was RBS’s advice to “sell everything”, which cited the possibility of a cataclysmic year for markets. This comment is proof that journalists aren’t the only ones who aim for a reaction to the information they release. In this example, they got it from one of Australia’s best known economists, Stephen Koukoulas. In an open letter on his website, Koukoulas offers to bet the mastermind behind these comments 10,000 AUD, that more than half the indicators he identified would be worth more at the end of the year than they are now. He finishes, “they are yet to respond to my generous offer. After all, they only have to get 6 out of 11 to win, not everything!”. The bet has not been accepted.

The ability to identify the descriptive from the deceptive and the useful from the useless is particularly important during times of market volatility. For example, we’d argue that what has actually been happening recently is a strong market correction that’s based upon negative sentiment and short selling (betting against the market). There are of course headwinds affecting the world economy, but there are also lots of reasons to be optimistic. Markets can quickly change in either direction (as I write markets are rebounding and the media has gone quiet), so it’s vital that you stick to diligent investment principles, keep your head when others around you are losing theirs and don’t always believe what you read.

On that note, please remember that we are here to help. Should you wish to hear our views on a particular topic and/or debate, please send your query to iinvest@dbwood.co.uk.

You can also read more about Stephen Koukolulas’ interaction with RBS here: http://thekouk.com/blog/the-sell-everything-bet-early-days-but-the-kouk-10-vs-rbs-1.html